How to tackle trade deficit with China

As top officials from the US and China hold a strategic dialogue in Washington this week, the Bush administration faces congressional pressure to act – not just talk – to address a widening trade imbalance between the two nations.

For just the first three months of the year, Chinese exports to the United States exceeded imports by $57 billion. That's nearly one-third of America's overall trade deficit with the world. It's up sharply from five years ago, when the first-quarter trade gap with China was $19 billion, or about one-fifth of the trade imbalance.

Many economists agree that the US trade deficit is reaching levels that can't, and won't, be sustainable for the long term. But a key question, embodied in the current differences between a restive Congress and the Bush administration, is what to do about it.

Some say that the proposed fixes could be worse than the problem. One bill recently introduced in Congress would slap new import tariffs on Chinese goods, a penalty for alleged currency manipulation that favors Chinese exports to America.

"The imposition of a tax [such as a tariff] is a poor way to go about trying to resolve" differences with China, says Michael Cosgrove, an economist at the University of Dallas. "We end up hurting somebody else here at home."

For one thing, a law that penalizes Chinese imports could make consumer goods more expensive in the US. Many businesses, too, would face higher prices for products made partly in China.

Other nations, moreover, might follow America's lead, making the world less open to the commerce that has helped fuel several years of strong global growth.

That's one reason Treasury Secretary Henry Paulson and his Chinese counterpart, Wu Yi, are stressing patience and diplomacy as they meet in Washington from Tuesday through Thursday.

"The win-win nature of this [trade] relationship is amply demonstrated by the rapid growth of bilateral trade," Vice Premier Wu wrote last week in The Wall Street Journal.

But while this week's talks represent the goal of long-term engagement, short-term tensions are bound to be a focus as well.

Speaking to students at the Harvard Business School in Boston earlier this month, Secretary Paulson acknowledged that the "strategic economic dialogue," launched by both nations last year, faces pressure. "If you don't get some short-term results, you'll never get to the long term," he said.

Several issues are of central concern. One is the protection of intellectual property, everything from patents to copyrights on music and movies. Another is alleged subsidies in violation of US trade statutes. The value of the yuan looms the largest for many China critics, because it affects the terms of trade across all categories of goods.

Page: 1 | 2